How to Calculate the Risk of a Cryptocurrency.

There are some statical tools by which you can calculate the Risk associated with any Cryptocurrency. I have chosen only basic tools and I will give you more advanced tools in upcoming posts.

Standard Deviation (SD)

SD measure the variation in the value of the Cryptocurrency. It is used as the measurement of the Risk.

• Note :- The absolute value of SD don't convey any meaning. It is used to Rank the Risk of a Cryptocurrency in relation to other Cryptocurrency.

Example

There are Three Cryptocurrency X,Y and Z of SD's 10,20 and 16 respectively, then Y will be the most risky Cryptocurrency ( highest SD ), X will be least riskey ( Lowest SD ) and Risk of Z will be between X and Y.

Variance

Variance=(SD)^2

It measures the Risk in the same way as SD.

Coefficient of variation

Coefficient of variation=(SD/Mean)X100

It indicates to the Risk per unit of currency of return.

Example

Coefficient of variation of a Cryptocurrency X is 20%, this means for earning an income of 1$, the Investor has to take the Risk of loss of 0.20$.

Beta

Beta is the indicator of an investment's /Systematic Risk ( Systematic Risk is concerned with economy as a whole Such as Change in Cryptocurrency protocols, Government Regulations for Cryptocurrency etc. This Risk affects whole market in same fashion. ). It represents systematic risk associated with an investment in relation to total risk associated with market portfolio ( In practical Cryptocurrency represent the whole market are taken only in market portfolio such as BTC, ETH, BCH etc. ). The Beta represents the riskiness of individual Cryptocurrency relative to market portfolio.

Example

If Beta of a Cryptocurrency is 1.25, it means the Cryptocurrency is 1.25 times riskier as compared to the whole market portfolio. If whole market portfolio varies by 1%, then the return from that particular Cryptocurrency is likely to varry by 1.25%.

Formula

Beta = ( covariance between the returns from market portfolio and return from those particular Cryptocurrency ) / Variance of Market portfolio.

Beta of market portfolio is taken as 1.

Thank you for reading.